PolyMedica Corporation (NASDAQ: PLMD) (Price: $41.95) recently issued a statement representing that it had received a “notice” from the Securities and Exchange Commission (“SEC”) stating that the SEC’s staff had terminated its PolyMedica inquiry. PolyMedica’s stock rose as much as 68% after the announcement. PolyMedica did not release copies of the alleged “notice.” However, there is absolutely no reason to believe that the SEC is not continuing in its investigation. In any case, the SEC investigation is not the major risk facing PolyMedica. Apparently, investors not only believed PolyMedica’s SEC claim but also conjectured that the Department of Justice investigation would be resolved favorably.
In addition to the SEC investigation, PolyMedica is also the target of an FBI Medicare fraud criminal investigation. (During the last twelve months over 72% of PolyMedica’s sales were reimbursable by Medicare.) In June 1999 the Department of Health and Human Services’ Office of the Inspector General (“OIG”) referred complaints about PolyMedica’s Medicare practices to the FBI. The OIG requested that the FBI investigate reports that PolyMedica had billed Medicare for supplies that were never ordered, overstocked beneficiaries and re-shipped and billed Medicare for returned supplies. In June 2000 the OIG published a report concerning fraudulent and abusive practices in the glucose test strip market. These include shipping excessive or unrequested test strips and unsupported payments to suppliers. The report questioned whether some of the products that Medicare had paid-for were even delivered. On August 21, 2001 the FBI conducted a search of PolyMedica’s office under a Federal court order.
In 2001 Medicare allowed an average of $36.36 per box of 50 test strips, for a total of 16.8 million boxes costing Medicare approximately $611 million. (See Accompanying Tables III and IV) PolyMedica had $189 million of revenues billed to Medicare in its latest twelve-month period. PolyMedica’s sales account for a small share of the total test strip market but a very large share of the Medicare test strip market. PolyMedica has been accused of conducting a massive shipping and billing fraud to augment the volumes and margins it gets from the government.
Medicare fraud appears to be a possible explanation for PolyMedica’s historical margins. The test strip market is highly competitive at the wholesale and retail levels. Average prices for both monitors and test strips have drastically declined. Drug store chains have introduced discounted privately labeled products. These low-priced store-branded products have become the industry’s best selling items. Low-cost generic “knock-off” strips that work with the best-selling monitors are being introduced. On-line discounters offer some products as low as 3% above manufacturers’ wholesale list prices. Buying cooperatives purchase test strips for 30% below manufacturers’ list prices. Some suppliers offer free monitors with the purchase of test strips. (See Accompanying Tables I and II)
PolyMedica is a mail order telemarketer in this highly competitive, low net operating margin market. PolyMedica processes a large number of low value orders with large advertising (See Accompanying Table V), collections, and Medicare and insurance claims handling costs. PolyMedica does not have any pricing power or cost advantage other than its questionable Medicare practices that can explain its reported margins in its dealings with the government.
The allegations against PolyMedica, contained in complaints to Medicare and the detailed accounts of former employees, are highly specific. PolyMedica is reported to be shipping test strips to senior citizens who did not order any strips, shipping strips that were not prescribed by a medical doctor, shipping excessive amounts of strips, failing to collect the required 20% from the beneficiary or their insurance company, not crediting Medicare for shipment returns, and illegally billing Medicare for these fraudulent shipments.
Asensio & Company, Inc. believes PolyMedica’s results are not sustainable and that its stock is grossly overvalued. Furthermore, there exists sufficient evidence of PolyMedica’s serious failure to comply with Medicare regulations to warrant a Federal investigation. We believe PolyMedica’s stock is grossly overvalued.